Unwise spending exposes Europe's economic errors

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Last Updated: Tue, Nov 20, 2012 15:30 hrs

The president of these Portuguese islands turned out, as he almost always does, for a ribbon-cutting ceremony at his government's latest showpiece investment: a panoramic steel-and-glass viewing point perched on what islanders claim to be Europe's highest cliff-top.

The price tag for the platform, parking lot and cafe was €2.5 million. That's a hefty outlay for a near-bankrupt archipelago of about 250,000 people which has €6.3 billion in public debt, needed a €1.5 billion bailout last year and has promised to be frugal. But development funds from the European Union, bankrolled by the continent's taxpayers, made it affordable by picking up €2 million of the tab.

For Alberto Joao Jardim, Madeira's president for the past 34 years of fast-rising official expenditure, the project was "fundamental" for the tourism sector and the region's economic progress. For critics, it was something else: part of the explanation of how Europe dug itself into its current financial mess through imprudent investments and misguided economic policies.

The EU's aid policy for less well-off parts of the continent, meant to help bridge the wealth gap between rich areas of the bloc and poor, has done much to boost livelihoods. But the bonanza of easy money also bred political vanity projects, bridges to nowhere, lax oversight and widespread corruption — and wiser investments that might sustain long-term growth were often neglected.

Meanwhile, the requirement to match the aid with local funds, often from bank borrowing, helped grow the piles of debt that are at the heart of Europe's financial crisis. This week, EU heads of state hold a special summit to hammer out the bloc's budget through 2020 — and development funds promise to be at the center of what likely to be an acrimonious debate on how to divvy up EU money.

The record of waste will almost certainly be a focus of the meeting. European spending on infrastructure has at times been "over the top and ... not quite necessary," says Raoul Ruparel, head of economic research at London-based think tank Open Europe.

Labor market reforms, training and education, and research and development — items that foster long-term growth — were often relegated to second place.

Spending on such projects as roads, bridges and ports "seems like a quick fix in terms of trying to get the employment figures up and (make it) look like there is development going on," Ruparel said, "but it's not a sustainable sort of economic model ... it won't really help in the long term."

Southern Europe, where countries have gone from feast to famine, knows that all too well. Greece and Portugal have needed bailouts that together amount to more than €300 billion, and Spain and Italy are floundering as economic growth deserts them. That's despite together qualifying for some €104 billion in EU development aid since 2007 and much more before that.

The European crisis, which is choking global growth, was years in the making. From Portugal's now discredited "politics of concrete" to ailing Spain's construction boom-and-bust, and highway and railroad racketeering in debt-heavy Italy, southern Europe for decades gorged on easy credit and hundreds of billions of euros (dollars) in EU cash taken mostly from the pockets of wealthier northern European taxpayers.

The time of plenty has ended, however. With money short due to Europe's debt crisis, and countries such as Germany vexed by what they see as abuses of their generosity by countries around the Mediterranean, EU leaders are determined to change by the end of this year the rules on who gets how much money and for what.

A two-day summit in Brussels starting Thursday looks set to bring a confrontation on the issue between opposing camps in the 27-nation bloc: wealthier northern European countries, which want an end to reckless spending, and less well-off countries eager to top up their depleted budgets with EU aid.

"I think we have learned a lot of lessons," Johannes Hahn, the EU's head of regional policy, said in an interview. He said "a lot of changes" are being considered to funding in the EU, the world's biggest economy.

Countries in the bloc of 505 million people pool financial resources in the EU's seven-year budget programs. Taxpayers in wealthier northern members like Germany pay the biggest amounts. Some of the money is set aside for so-called structural funds, to help less prosperous areas bring their standards of living closer to the EU average.

In the 2007-13 period, for example, funding for those policies amounts to €347 billion. That represents a colossal 36 percent of the total EU budget for that period and has long been the second-largest outlay after farm subsidies. The European Commission flagged it as "the greatest investment ever made" to support growth and job creation.

But EU economic growth is near to stagnant, living standards are sinking, and jobless rates are rising to unprecedented levels in the hardest-hit countries.

When governments request EU aid, they have to come up with matching funds for a project — usually between 15 and 50 percent, either from their own Treasury or bank loans.

For years, European financial watchdogs have complained about difficulties tracking and assessing the benefits of allocated money. In an appraisal of the measures enacted in the 2000-2006 period, the European Commission concluded the funds had helped economic development but was unable to quantify by how much. "Identifying achievements so far from the funding provided ... is made difficult not only by delays in implementing programs but also by the unsatisfactory nature of the information available to do so," another Commission report acknowledged last year.

The European Audit Court, which oversees EU spending, has repeatedly scolded officials for lax accounting and inadequate oversight covering a spider's web of funds, organizations and acronyms generated by Brussels bureaucracy.

"Put simply, the Court found too many cases of EU money not hitting the target or being used sub-optimally," Vitor Caldeira, President of the European Court of Auditors, said this month, when presenting the body's report on 2011 spending.

Across southern Europe examples of questionable spending decisions are easy to find.

Almost a third of the roughly €35 billion of structural funds that went to Spain over the 2007-2013 period was channeled to infrastructure projects — ignoring perilous over-investment by the country's regional governments that now are appealing for financial rescues. Despite the billions poured into the Spanish economy, the country is in the grip of a double-dip recession with a 25 percent unemployment rate.

A three-year investigation by European and Italian authorities into EU-funded road-building programs in Sicily, meanwhile, unearthed illegal sub-contracting, a lack of proper oversight and conflicts of interest, among other shortcomings. Italy had to repay €389 million.

Italy's southern Mafia heartland also yielded some of the more scandalous cases of abuse. According to an inventory compiled by the Open Europe think-tank, one program in Sicily involved around €300 million to improve trash collection and recycling. The recycling target was fixed at 35 percent, but the island achieved only 6 percent. Also, €230 million was used to improve Sicily's railway network, but only eight kilometers (five miles) of track was repaired. That comes out at almost €29 million a kilometer.

The EU's anti-fraud agency, OLAF, says last year it recouped about €690 million after investigations across the bloc. The biggest amount — €525 million — was recovered from structural funds.

In Portugal, which has collected almost €50 billion from the EU over the past two decades, an infrastructure construction spree became so notorious it got its own moniker — "a politica do betao" (the politics of concrete) — as politicians plundered the aid programs for vote-winning projects. In 1989, Portugal had just 210 kilometers (130 miles) of highways; 20 years later, it had 2,860 kilometers (1,777). That's a lot of highway in a country about 550 kilometers (240 miles) long and less than 200 kilometers (125 miles) wide.

With EU aid looking like a free lunch, Portugal neglected to modernize, and the excessive emphasis on infrastructure pulled its economy out of shape. The upshot: Due to low productivity, low education levels and low technology, Portugal languished in the first years of the new century with average annual growth below 1 percent. It has now gone into reverse with its third recession in four years amid a mountain of debt.

The windfall produced notorious excesses in the Madeira Islands. But just two years ago European Commission President Jose Manuel Barroso, a former Portuguese prime minister, touted the region as a model of EU growth. The aid for years delivered spectacular returns, helping lift average local living standards to above those in Italy and just lower than France. Thirty years earlier it was one of bloc's five poorest regions.

The glut of aid invited extravagance as Jardim, Madeira's president, rode a wave of popularity that made him one of Europe's longest-serving political leaders. Plaques saying he inaugurated ocean swimming pools, libraries and health centers punctuate any trip around the balmy, semitropical island of deep gorges and thick forest.

The wisdom of Madeira's lavish, EU-sponsored spending is now in question as it wobbles on the edge of its own fiscal cliff. White elephants include a €38 million harbor which sits empty, its entrance silted up; a business park built on a misty, remote hillside for €2.5 million that lies barren; and a €670,000 oceanside helipad where, locals say, no helicopter has ever landed.

Jardim is unapologetic. On the sidelines of the recent inauguration of the 580-meter-(1,900-feet)-high cliff-top viewing point at Cabo Girao, he continued to preach the benefits of past EU policy and brushed off talk of financial folly.

"In small territories different criteria have to be used, which in this case is to continue the (financial) support for the creation of infrastructure because that creates jobs," he said.

European leaders, however, want to shift away from what they see as unproductive economic policies. The new slogan for the 2014-20 budget period is "smart growth." That will likely translate into stimulus packages for the EU's 23 million small businesses and more skill training — a "more targeted investment and better use of funds," Regional Policy Commissioner Hahn said.